Is First Business Financial Services Inc (NASDAQ:FBIZ) Over-Exposed To Risk?

Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$231.03m, First Business Financial Services Inc’s (NASDAQ:FBIZ) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off First Business Financial Services’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of First Business Financial Services's a stock investment. Check out our latest analysis for First Business Financial Services

Does First Business Financial Services Understand Its Own Risks?

First Business Financial Services’s understanding of its risk level can be estimated by its ability to forecast and provision for its bad loans. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does First Business Financial Services understand its own risk?. First Business Financial Services’s low bad loan to bad debt ratio of 93.05% means the bank has under-provisioned by -6.95%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.

How Much Risk Is Too Much?

First Business Financial Services’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Typically, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans. Bad debt is written off as expenses when loans are not repaid which directly impacts First Business Financial Services’s bottom line. A ratio of 1.28% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.

How Big Is First Business Financial Services’s Safety Net?

First Business Financial Services makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since First Business Financial Services’s total deposit to total liabilities is very high at 80.34% which is well-above the prudent level of 50% for banks, First Business Financial Services may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will FBIZ’s recent acquisition impact the business going forward? Should you be concerned about the future of FBIZ and the sustainability of its financial health? The list below is my go-to checks for FBIZ. I use Simply Wall St's platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.

1. Future Outlook: What are well-informed industry analysts predicting for FBIZ’s future growth? Take a look at our free research report of analyst consensus for FBIZ’s outlook.
2. Valuation: What is FBIZ worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether FBIZ is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.